Itaú BBA - Volatile markets, stable interest rates

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Volatile markets, stable interest rates

February 1, 2016

In a context of worsening global markets, local markets also suffered a significant decline.

The Brazilian Economy in January 2016

In a context of worsening global markets, local markets also suffered a significant decline. The BCB kept the interest rate stable, at 14.25%, and the government announced measures to stimulate credit through state-owned banks. Production and sales data, in addition to the labor market, remained weak, but there was some stabilization in confidence indicators. In 2015, inflation reached 10.67%, and the consolidated government's primary deficit stood at 1.9% of GDP. The adjustment in the balance of payments continues, and direct investment in the country exceeded the current account deficit in 2015. President Dilma Rousseff sanctioned the repatriation law. Congress returns from recess on February 2. Meanwhile, the Lava-Jato investigation continues to progress. 

Markets deteriorate during January

In a context of worsening global markets, local markets also took a hit. The Ibovespa fell by 6.8% for the month, closing at its lowest level since 2009. In dollar terms, the index decreased 10%. The exchange rate depreciated by 3.5%, closing the month at 4.04 reais per dollar. Country risk measured by the 5-year CDS closed down 22 bps, at 473 bps.

Brazil’s central bank keeps the interest rate at 14.25% 

The Monetary Policy Committee of the Brazilian Central Bank (Copom) kept the Selic rate stable, at 14.25%. The decision ran counter to the BCB's signal over the previous months (that it would hike rates). The minutes of the meeting highlighted the change in global conditions, with lower growth and higher risks, including for financial stability.

Government announces stimulus to credit through state-owned banks, at CDES' first meeting this year

With the resumption of the Economic and Social Development Council (CDES, a body composed of 92 representatives from different sectors of society that advises the President of the Republic), the government announced measures to stimulate credit, with a potential BRL 83 billion increase in supply. In addition, President Dilma Rousseff and Minister Nelson Barbosa defended the importance of adjustments in the social security system and a proposal to limit government spending.

Production and sales remain weak, but confidence levels grow

Industrial production declined 2.4% in November, much weaker than market expectations. Year over year, the drop was 12.4%. The highlight was the contraction in the extractive industry, influenced by the rupture of a mining dam in Mariana (MG) and the oil workers' strike. Retail sales positively surprised in November, with broad retail sales (including vehicles and construction materials) up by 0.5% mom/sa. The result was positively influenced by the anticipation of year-end shopping, but year over year the drop remains significant, at 13.2%. On the positive side, both business and consumer confidence indicators showed some reaction in January, although remaining at historically low levels.

Labor market continues to weaken

The national unemployment rate ("PNAD contínua") reached 9.3% in the quarter ended in October, and the regional rate (in the six largest capitals) reached 8.2% in December, both seasonally adjusted. The destruction of formal jobs, according to CAGED, stood at 118 thousand in December, seasonally adjusted, while the full-year result was a negative 1.5 million.

IPCA rose 10.67% in 2015 

The IPCA rose 0.96% in December, below the estimate and the floor of market expectations. Thus, the index ended 2015 with a 10.67% variation, well above the rate posted in 2014 (6.41%). Last year, the largest upward contributions came from food, housing and transportation. January’s IPCA-15 was 0.92%, or 10.74% year over year.

Public sector posts a primary deficit of 1.9% of GDP in 2015

In December, the central government posted a primary deficit of BRL 60.7 billion. The weak result for the month was related to the payment of BRL 56 billion in delayed expenses. The regional governments also delivered a negative result, posting a USD 9.8 billion primary deficit. In 2015, the consolidated government primary deficit reached BRL 111.2 billion (1.9% of GDP).

Current account deficit continues to drop, remaining below direct investment

The current account deficit in December totaled USD 2.5 billion and was in line with our forecast, while direct investment in the country (DIC) surprised and reached USD 15.2 billion. Part of the positive result is linked to transactions in the Automotive sector (USD 2.6 billion) and the Electricity sector (USD 2 billion), the latter probably related to the auction of hydropower plants. In 2015, DIC totaled USD 75.1 billion (4.2% of GDP) and was the main source of financing for the current account deficit, which ended the year at USD 58.9 billion (or 3.3% of GDP).

President Dilma sanctions repatriation law, but with vetoes 

President Dilma Rousseff signed a bill that provides amnesty to Brazilians who have undeclared funds, but in exchange for a fine. She did, however, veto parts of the bill. Among them, the president vetoed the item that required the regulation of the law within 30 days, as of its publication, and she also rejected the item providing for the allocation of funds to states and municipalities. The government expects to raise BRL 20 billion with this measure. The vetoes have been submitted to congress for approval.

What’s Next?

Congress returns from recess on February 2, when the impeachment analysis will also be resumed by the Lower House.


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